My Interview with Pat Dorsey

I had the privellege of interviewing Pat Dorsey in late February . Pat was very busy switching jobs (his bio is below) and he was only able to go through the transcription a few days ago. Below is a brief excerpt followed by a link to the full interview on Guru Focus.

The biggest misconception that most people have is that they think bigger is better, and also that managers are supermen. A lot of people confuse size, whether being a larger business or having a large market share, with having a strong competitive position, and I would like to point out the strong counterexamples of General Motors and Compaq. It’s a good example of businesses that were bigger but not necessarily better. And also people often think that managers can do anything. That if you have a great manager, that matters a lot more than a business’ competitive advantage.

It’s like the old saying of betting on the jockey and not on the horse. And, while betting on the jockey makes a lot of sense, it only works if all the horses are thoroughbreds. Not all businesses are thoroughbreds. Some businesses are structurally built to generate higher returns on capital in a better way than others. The manager of an airline will never generate high returns on capital, no matter what a genius the person is, it simply won’t happen due to the structure of the business. And I think that sometimes investors get starry eyed over great CEOs to their peril.

My favorite example is David Neeleman, of Jet Blue. Phenomenal entrepreneur, created the only business to ever get bought by Southwest, which made him sign a ten year non-compete. He went to Canada, started West Jet, the non-compete expired and he comes back to the U.S. and starts Jet Blue. Amazing story. But Jet Blue’s cost structure was never going to be lower than the day that they went public because planes don’t get newer — they get older. Baggage handlers and pilots don’t get less seniority they get more, and they want more money. At the end of the day it’s a commodity industry. So betting on the jockey rather than the horse makes sense if all the horses are the same, but at the end of the day, Pat Dorsey on a thoroughbred can probably beat a professional jockey on a goat. Some businesses are goats and some are thoroughbreds.